Business update: US economy slowed to 0.1 percent growth rate in Q1

Wednesday

Apr 30, 2014 at 6:00 PM

The U.S. economy slowed sharply in the first three months of the year as a harsh winter exacted a toll on business activity. The slowdown, while worse than expected, is likely to be temporary as growth rebounds with warmer weather.

The Associated Press

WASHINGTON — The U.S. economy slowed sharply in the first three months of the year as a harsh winter exacted a toll on business activity. The slowdown, while worse than expected, is likely to be temporary as growth rebounds with warmer weather.

Growth slowed to a barely discernible 0.1 percent annual rate in the January-March quarter, the Commerce Department said Wednesday. That was the weakest pace since the end of 2012 and was down from a 2.6 percent rate in the previous quarter.

Many economists said the government's first estimate of growth in the January-March quarter was skewed by weak figures early in the quarter. They noted that several sectors — from retail sales to manufacturing output — rebounded in March. That strength should provide momentum for the rest of the year.

And on Friday, economists expect the government to report a solid 200,000-plus job gain for April.

"While quarter one was weak, many measures of sentiment and output improved in March and April, suggesting that the quarter ended better than it began," said Dan Greenhaus, chief investment strategist at global financial services firm BTIG.

Still, the anemic growth last quarter is surely a topic for discussion at the Federal Reserve's latest policy meeting, which ends Wednesday afternoon.

In its report, the government said consumer spending grew at a 3 percent annual rate last quarter. But that gain was dominated by a 4.4 percent rise in spending on services, reflecting higher utility bills and an expansion in health care spending from provisions of the Affordable Care Act. Spending on goods barely rose. Also dampening growth were a drop in business investment, a rise in the trade deficit and a fall in housing construction.

The scant 0.1 percent growth rate in the gross domestic product, the country's total output of goods and services, was well below the 1.1 percent rise economists had predicted. The last time a quarterly growth rate was so slow was in the final three months of 2012, when it was also 0.1 percent.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said he expects growth to rebound to a 3 percent annual rate in the current April-June quarter. Other economists have made similar forecasts.

A variety of factors held back first-quarter growth. Business investment fell at a 2.1 percent rate, with spending on equipment plunging at a 5.5 percent annual rate. Residential construction fell at a 5.7 percent rate. Housing was hit by winter weather and by other factors such as higher home prices and a shortage of available houses.

A widening of the trade deficit, thanks to a sharp fall in exports, shaved growth by 0.8 percentage point in the first quarter. Businesses also slowed their restocking, with a slowdown in inventory rebuilding reducing growth by nearly 0.6 percentage point.

Consumer spending on goods rose just 0.4 percent, the smallest gain in nearly three years. That made for a tough quarter for The Legacy Companies, a Fort Lauderdale, Fla.-based company that makes blenders, juicers and other kitchen supplies.

Neal Asbury, the CEO, said his U.S. sales fell 5 percent in the first quarter. Retailers such as Macy's, Bed Bath and Beyond and Kohl's had stocked up on his company's wares in anticipation of solid first-quarter sales, as in previous years. This year, "that didn't happen to the degree people expected it to happen."

But in recent weeks, retailers have started to clear out their excess supplies, Asbury said. That could boost his company's sales in future months once retailers need to restock.